The Craig Fahle Show

Bankruptcy reporter and Next Chapter Detroit blogger Sandra Svoboda and Attorney Sam Alberts, who represents the Official Committee of Detroit Retirees , both join Craig to discuss the differences between the bankruptcy process and collective bargaining negotiations in Detroit. As Detroit pensioners prepare to vote on the Plan of Adjustment, Alberts says it’s important to remember that this is a different process than collective bargaining.

Craig Fahle: Let’s talk a little bit about your career trajectory first. I want to get that out of the way. You’ve been working for Conway MacKenzie, this is one of the firms that is involved in Detroit’s bankruptcy proceedings. The announcement of this came out and there’s was a lot of response to this. Of course the Democrats wanted to suggest that this is proof of some crony capitalism going on. A lot of people making hay of this, and even Conway MacKenzie said they didn’t necessarily want to publicize this because they were worried about a potential backlash. How worried were you about a potential backlash?

Andy Dillon: It’s an election year so you can expect that but the accusation that this was quid pro quo but you know the interviews for hiring the firm with Detroit was 10 people in the room, the city ultimately made the choice so I was one of 10 people involved.

CF: Talk a little bit about your role at Conway MacKenzie, what you’re going to be doing. One of the things you’ve said is that the vast majority of your work is going to be out of state. Is that the best utilization of your resources and your skill set given the knowledge that you have about what’s happening here in Michigan.?

AD: I think so. I mean, clearly Detroit is not alone in terms of being a trouble unit of government and what I learned in the job as treasurer, I had 10 emergencies and probably a couple dozen cities that were under stress so I spent three years working with them and what I discovered in that role is the private sector turnaround folks don’t make the transition all that well to government. It’s just a different animal. Conway has as much Chapter 9 experience as any firm in the country. They’ve been involved with Stockton and Jefferson County, Alabama.

CF: That’s not saying a whole lot because there’s not that many instances of this. But when you get a sense and you look at the way this is progressing in Detroit, do you see this becoming a more attractive option for a number of cities that were really fearful of this option before?

AD: I wouldn’t say more attractive.

CF: There’s nothing attractive about it but it may not be as bad as they potentially thought it could be.

AD: The rules of the road haven’t been established yet. That’s why there’s uncertainty in this, But having that option out there is helpful and you see Harrisburg, Pennsylvania, they actually restructured outside of a bankruptcy. That’s the ideal way to go and I think that’s where one of the needs that we had at the state level was when you have a broken city, a broken balance sheet, typically they also have broken operations and that’s where the roots of this firm growing up in the automotive sector, when they came int o deal with a troubled supplier, they had to make sure the part shipped on time so they became both operational as well as financial advisers. It’s that ingredient that’s kind of missing in the private sector right now.

CF: But you look at a situation like Harribsurg, different situation than in Detroit. You look at the outstanding liabilities Detroit had with pension obligations and some pretty bad deals they had made, the interest rate swaps and all that kind of stuff. Is there a point where you look at it and say it’s just not a viable option to think about doing this outside of a court-overseen restructuring?

AD: That’s right. I think Harrisburg, one incident was an incinerator that indebted the city beyond what they could handle

CF: And that’s basically what happened in Alabama as well. There was a facility, I think it was a wastewater facility.

AD: You’re right. There are so many creditors in Detroit, to try and harness any kind of an outcome. A “9” is probably your best option.

CF: So that begs the question, I mean, at what point did you recognize that Detroit was going to have to go that route. A lot of people would suggest that we just had this dog and pony show with some of the various steps we had to take to get to this point.

AD: If you look at Detroit’s situation it was really the retirement health care, and right now there’s litigation ongoing in Flint where they tried to adjust the health care because the liability in Flint when I started as treasurer was $860 million on a budget of $60 million. So that was clearly unsustainable, and Flint made some adjustments and now are in the federal court litigating whether or not they can make those adjustments. That was the biggest problem for Detroit: $5.8 billion of unfunded liability for retirement health care. That really was what the primary issue was for Detroit.

CF: Was it obvious though when you started this whole process that we were eventually going to get to this point but you have to take these certain legal steps to get there.

AD: I wouldn’t say it was pre-ordained now because you didn’t really know at the outcome that the health care solution would be for Flint. FI you could restructure that outside of a Chapter 9 then Detroit had a fighting chance but unfortunately they couldn’t make the changes fast enough, and what really was kind of at the very end that called the question was when they were running out of cash. I ‘ll let you know because I think we’ll have to start moving hen.” And it was November of 2012, I think when they were actually below $50 million in reserves and I called up the governor and said, “I think we need to start a review.”

CF: When you took that job you were obviously in the Legislature for a long time before that but did you really have a full understanding before you took the Treasurer’s job as to the precarious state of so many communities’ fiscal situations?

AD: It was on our radar but what I didn’t realize is it turns out that I probably spent 75 to 80 percent of my time on distressed local units and that, I don’t know if a prior Treasurer ever spent nearly that time on distressed local units of government so it was a completely different job in my three-year tenure.

CF: How much of that was due to the fact that Gov. Snyder has basically said, “We can’t have this. We have to fix it.” Were we in denial before that?

AD: Yeah. I think so with a lot of units. The city of Highland Park has been in serious trouble for a long time, Flint as well. Here’s a governor willing to roll up his sleeves and do the tough stuff and I valued that. It was great to work for him.

CF: Well you know you start this process, of course, you’re no longer the state treasurer but you watch what’s happening right now, the Grand Bargain coming together in the Legislature. You spent a lot of time there at a very, very hyper partisan time in Lansing when you were there. It was a tough place to get anything meaningful done because of the divide that existed. Are you surprised that they’ve been able to come together and that the House votes came out the way they did?

AD: Yeah, a little bit. I kind of sense it was going to get done just with the tenor and the tone of the media reports on its possibilities. You know it’s the right thing to do. The sooner we get Detroit out of the Chapter 9 process the better.

CF: What about this grand bargain, tough? It’s really remarkable to see the different parties coming together to support pension funds the way that they are, protect the DIA at the same time. When you start this process do you look at that as something that’s, was it on anybody’s radar before a couple of people really stepped in and kind of created this negotiation?

AD: We put a lot of time into prepare for Detroit whether it be a Chapter 9 or just an out-of-court restructuring so if you really look at that 10-year plan, that’s the focus. The challenge for Detroit is going to be holding up to that plan, and you’ll see there’s about half a billion dollars of revenue that should come in without raising taxes but that requires execution and then there’s, don’t hold me to the number, but maybe $600 million of savings from being more efficient and that will require execution as well. Even when the Chapter 9 process is over, there’s still execution risk to the transaction.

CF: So for you looking at the revenue structure in Detroit as you did obviously when you decided to go this route, what are the potential red flags that you see about Detroit’s ability to stay out of this situation? Population loss is a big part of the problem.

AD: Mayor Duggan hit the nail on the head yesterday: we’re not going to solve Detroit without regrowing the city, and I think his focus on selling homes rather than demolishing them is a great first step. That’s one thing I do like about the plan as well. Gov. Snyder said we’re not just going to fix the balance sheet and move on. We’ve got to improve the city. So if you look at the 10-year plan, there’s $1.5 billion being invested in improving the services for the city and making it more livable. So it’s going to be a five- to 10-year turnaround but the commitment to grow and improve the city is there, and I think that will be the magic ingredient.

While Kevyn Orr was at the Mackinac Policy Conference last week, he sat down with WDET’s Craig Fahle for a segment on the show. Here’s a transcript of what Craig asked and Orr said with some links to articles and posts to provide background and context for the conversation.

Craig Fahle: Talk about squeezing this in and why it’s important enough to squeeze in a conference like this while you’re in the midst of all this.

Kevyn Orr: We are at a critical stage and we have some significant milestones coming up whether it’s getting the funding from the Senate, getting the vote on the plan. There are some actives who are a little reluctant, and we want to make sure they understand the risk and the reward of doing that. This is really an opportunity for me to get and tell everyone we are not done by any stretch of the imagination. We may be in the third turn coming into the fourth. We’ve got that fourth turn, we’ve got a long, long runaway, straightway and we can’t really trip up now. That’s why it’s important.

CF: I think there was a little understatement there and a little reluctance is the phrase you used. Talk about the conversations you’re having, or are you able to have conversations about this or does it create a problem with the vote.

KO: We’ve been having town halls, my staff, and I’ve been speaking to some of the leadership but it’s really critical because I think one of the thing I have not done, I didn’t want to be a fear monger. One of the things I have not done is say: If we don’t get this funding, if we can’t get this vote, we don’t just go back to square one. The outcome of the plan would be much more draconian. We’re talking about retirees having to choose between medicine and cat food in some cases. There could be cuts as deep as 40 percent. For someone making $20,000, they could lose 8,000, end up on 12,000. That means they could end up on the federal poverty level which mean they go to the state for assistance, Medicare, Medicaid for their kids, it would be catastrophic. I didn’t want to be alarmist but I do want to say this is significant. It’s very, very important that we get this done.

CFS: One of the things that we talked about very early on in this process when you were developing the original plan of adjustment here was whether or not there was going to be some floor which you would not allow people to fall through when it came to the cuts.

KO: And we have that in this plan. We took some of the unlimited general obligation tax bond settlement and used it for an income stabilization program so that no one, no one is pushed over into poverty. But if we don’t have the settlements approved, if we don’t have the plan, that goes away because we don’t have a deal with our bondholders and we may not be able to do that so what we retelling some of the members in the House last week was look this is going to come to the state one way or another, either through the state settlement, that present value funding of the $195 million or through increased people on the assistance roles, we need to tell the voters, the constituents that are out there. This is significant. It is an opportunity for us to reset the city, it is an opportunity for us to preserve you and your health care and potential pensions but without it, it would be much more drastic.

KO: No it doesn’t actually because the funny thing about it, when we found out that some of the information was inaccurate, I said immediately, look, let’s go correct it, let’s do the right thing, let’s do this right. We don’t want anyone to feel that they were gamed and not change it. The net result is it’s actually better for those 2,000 potential employees or retirees because it’s a lower cost to them for the alternative savings fund. That’s what drove it when we got the information, the actual calculations went down. They got a better deal even though administratively we have to get these ballots out.

CFS: The judge was less than pleased.

KO: As he should be.

CF: So he wants a name by Friday as he said.

KO: That’s in litigation. I’m going to leave that to my litigation team. We’re correcting the problem but I certainly appreciate the judge’s consternation at trying to run a fair and accurate process and how a glitch could upset a jurist in that way.

KO: We had spent some time up on the hill in Lansing and went through the business case for the funding. And when you did you saw the light go off in people’s minds of saying, “Oh, OK, I understand it. I get it now. This is not only in the interest of Detroit it’s in the interest of the state if not in the interest of the country because Detroit is one of the 21 economic centers, metropolitan economic centers in the country that accounts for half of the United States $16 trillion GDP. So it’s also an economic conduit for the entire state and as I said before, if people don’t get this funding, if we don’t get this resolved, people will be pushed into poverty They’re coming to the state one way or another. There are folks who certainly have some sincere and well thought out concerns in the out state but I think when they looked at the merit of the solution, the fact that it was lower to do it at net present value financing, it was expressed in the vote. We’re very thankful for that.

CF: Mayor Duggan, of course, gave a pretty rousing speech a couple of days ago at the conference and it certainly seems to me as if he’s suggesting that he can handle this job once your term expires and the council and the mayor have made it pretty clear that even if you agree to stay on past this original term that likely isn’t going to happen. What stage does this bankruptcy need to be in for you to feel comfortable to step away at that point?

KO Certainly we put a lot of blood, toils, tears and sweat into this thing. We want to make sure get through the confirmation hearing and we have an order but as the judge has said he wants to make sure that it’s done in the right way. We’re going to be respectful of that process and the issues that the court process has to go through to get there. We’d like to think that we’ll keep to the schedule that’s out there right now and by the fall, certainly by October, we get a ruling in and then be able to go through that process and go forward but well deal with that as it comes up.

CF: There’s been a lot of discussion in recent days about the water department. I know this is still in litigation, there are still negotiations going on and the judge has put a gag order on so we can’t get into a lot of it at this point in time but suburban leaders have been pretty vocal and not necessarily observing the gag order on this question and there’s some discussion about tying this potentially to the grand bargain discussions in the Senate.

KO That would be a mistake. You know, the issue of an authority. I think Judge Feikens began discussing this in 1982, 1984. Certainly Judge Cox who is the mediator in this case discussed in his opinion last year. So this has been going on for a long, long time. We proposed what we thought was a solution to address all their concerns. For whatever reason that didn’t happen. We’re in mediation so I can’t talk in details but we’re going to dual track it. We’re also talking to one of the biggest operators and managers of water in the country, two of them, actually for a potential contractor and we’re going to pursue that as well. We certainly think an authority is in the best interest of the city and its customer base, meaning the counties, but we’re at a point now where we can’t wait around for people to finally see if they can find their way. We’re more than happy to try to pursue it though.

CF: When you talk about the water department and potential privatization, is there a situation where you could see a whole sale of the water department or would it strictly be some public-private partnership?

KO: No, we’re talking about operational and management contracts which is not a sale. In fact, specific terms of the RFP that we sent out would be that all of the assets, including the assets that we have now as well as any assets that are developed over time under the management, remain assets of the city. I want to be very clear about this. There’s no discussion whatsoever about selling the water department. We’re talking about managing it as other communities have quite successfully for the benefit of the city and the counties.

KO: Well, you know, when the chief came in, one of the things we wanted to focus on it’s not just the mayor, the police commission wanted to focus on was restructuring the department in a way that made sense and how departments are structure around the world. The chief has done a wonderful job. He’s driving violent crime down by double digits. Car jackings are down by 12 percent this year. There will come a time when it will become appropriate for us to go back to ordinary course both for the mayor and the police commission but I wanted to give the chief the opportunity – he’s only been here for less than a year and look at what he’s done in that time. I wanted to give him the opportunity to do the restructuring that needed to be done for the department to make the department a modern-da police force in the city and then there will be a transition period and I think that’s appropriate.

CF: Would you expect anything else from a mayor other than the type of chirping that “I need control of all this”? Does that impact the relationship?

KO: No it doesn’t. The mayor and I talk regularly. I certainly know that any mayor wants control over martial organization like the police but we have as he’s probably said, some fairly frank discussions. I would be more concerned if the indicators were going in the other direction, if crime was up. It’s not. If carjackings were up. They are not. If we weren’t solving cases and handling evidence the right way. We are. In fact in the past year now from one of the consent decrees, the one regarding confinement, we’re hopefully trying to get out from under one we’ve been under for 10 year dealing with excessive use of force. So there’s been progress just in that time. I understand it. I appreciate it. But all the indicators are going in the right way, and as I said, when the time become appropriate, hopefully in the near term, we’ll make that transition;.

CF: At the beginning of this interview, you said, “We’re still a long way from being done. We may be approaching the third turn.” Talk about some of the red flags that are still out there for you. Obviously some of the bond insurers have been throwing all kinds of legal action which you would anticipate. You told us this as going to happen. But what are the red flags that are still out there for you. The vote, obviously.

KO: I take nothing for granted. A friend of mine told me a long time ago, just because you’re paranoid doesn’t mean someone’s not trying to kill you. I keep up a healthy level of paranoia. Even last week with the vote in the House, I was watching it anxiously. Same thing now coming into the Senate. I take nothing for granted. These are autonomous legislatures who have to have their own counsel, make their own conscience. So we’ve got to get through that. I don’t take the vote for granted. I think this plan: 100 percent restoration of pensions and cost of living for police and fire, in my mind I can’t imagine anyone would vote against that but maybe somebody has other issues. For the GRS retirees, general service, I certainly recognize that for them it’s not just the 5 percent cut that’s going on in their pensions but also alternative savings fund, but that’s a result of over double-digit returns, excess returns that shouldn’t have been gotten, money taken out of the trust, which is my requirement as a fiduciary to put it back. We’re not taking all of it. We’re taking 20 percent. So I understand but even that’s better than the outcome so in my mind, this is a really fair deal, compassionate. Certainly Syncora has voiced a lot of concerns that it’s not fair. I had a friend in New York tell me today that they’re getting packages from some of the financial press in New York that are hearing from some of the bond insurers trying to undermine the deal and sell the art. They’re making a full court press.

CF: They cannot demand that that happen.

KO: They can demand anything they want but under the statute, we don’t have an obligation to sell it. That’s one of the benefits of Chapter 9. The thing that people that are trying to speak to have to understand that even if we did, those funds wouldn’t be spread to pensions, they’d be spread out over the whole $12 billion of unsecured debt resulting in less money to the pensioners. They’re creditors and that’s what they’re going to do: try to run the tables on that. Then we’ve got to go to the confirmation hearing which promises to be a battle royale.

CF: Are we really attempting right now to sort of define what constitutes fair in a Chapter 9 bankruptcy? Because this is a rare thing.

KO: You have to be fair and equitable. You can’t have unfair discrimination.

CF: Who decides? Is it solely the judge?

KO: The judge. The judge has a heavy lift. That’s part of his job. We have to be sure we can defend our case and the decisions we’re making under the doctrines of Chapter 9 which give the municipality, for instance, it gives us exclusivity. Only we can file a plan of adjustment unlike Chapter 11 where creditors can. The doctrine of Chapter 9 recognizes municipalities’ inherent autonomy to control its affairs and its assets.

CF: Does the guidance of a mediator in this process give you more confidence that the deal that are negotiated to in all of this are going to be agreed to by the other judge. Because Gerald Rosen has been working very hard on these things but the (bankruptcy court) judge hasn’t always gone along with the recommendations that he’s made.

KO: I’ll tell you this: We would not be where we are without the help of Gerald Rosen, Judge Rosen and his mediators. These deals have been worked late into the night, 24/7, weekend calls. I can’t tell you how many Sunday, Saturday night after midnight calls we’ve had. Around the clock. We would not be where we are without that mediation process and certainly the mediators are not the presiding judge. Judge Rhodes ultimately has to decide. That’s his role. These mediations on a consensual agreement are really unprecedented. They’ve been tremendously, tremendously helpful and valuable. We wouldn’t be where we are without them.

CF: One last question. Obviously it’s not a done deal yet. We can’t write the book on what Detroit’s bankruptcy is going to look like but is the process going better than you thought it would.

KO: I’m going to be careful. The minute I say it’s going better somebody is going to make sure it’s going worse. That’s just the nature of the beast. Are we further along? Look, if you had told me a year ago that we would have the agreements with some of the counterparties that we have, that we would have almost a billion dollars of new cash coming into the city to deal with pensions, that we would be further along with some of the restructuring efforts to be involved in, that we gave $12 billion last June to the public lighting authority. They didn’t use it but just in the past six months, the mayor, the council, the lighting authority are turning on 500 lights a week. If you told me we’d be at this point a year ago, I would have been somewhat skeptical. I would’ve thought it would come down right to the wire. We’re doing a little bit better than I had anticipated but we still have a long, long road and a lot of pitfalls and a lot of folks that are trying to trip us.

Detroit Mayor Mike Duggan tells Craig that he has a “good working relationship” with Detroit Emergency Manager Kevyn Orr, and is expecting a smooth transition come October. Duggan supports the state bills for Detroit funding and says it has been a great example of bipartisan support and cooperation.

Speaking of the emergency manager, Kevyn Orr sat down with Craig and reviewed all the current happenings in the bankruptcy case: voting on the plan, incorrect ballots mistakenly sent to some retirees, the timetable for the case, the status of the “Grand Bargain” legislation in Lansing…and more.

Gov. Rick Snyder also came by and tells Craig he approves of the $195 million lump sum provided for in the pending state legislation for the “Grand Bargain” package. “It’s the net present value concept, that’s the old accountant in me coming out,” explains Snyder. However, Craig points out that there could be some potential for new legislation that could involve the Detroit Water and Sewerage Department. Snyder says he does not believe that it would be an appropriate form to use it in, but he does think the current “Grand Bargain” plan will be fundamental in getting “this whole thing resolved.”

“The governor is here on the Island running around saying that’s a bargain, well hell yeah, it’s a bargain for the Detroit Water and Sewer board but not for the rate payers in my county,” Patterson says. “We’ve got 20, 30 years or so of mismanagement, fraud and waste, and I just think frankly much of this has been done under the watchful eye of the Department of Treasury that gives them the stability work out programs and allows them to go out and bond and borrow more and create more debt. I think the state should have a seat at the table. Why should they pass this off on the ratepayers that had nothing to do with the corruption?The state did have something to do, they did have a responsibility to monitor the Detroit Water and Sewer board because they extended them credit.”

Meanwhile, Macomb County Executive Mark Hackel said part of a problem related to Detroit’s Chapter 9 is a lack of understanding about the resulting financial issue for the region. “My job is to try to get (Detroit retirees living in Macomb County) to realize, ‘My god, Detroit is extremely important to Macomb County,’” Hackel said.

In addition, Hackel said Macomb County needs to address the pressing problems of infrastructure and outstanding pension obligations. The county “soon” will announce plans for addressing retiree health care.

Craig also spoke with with State House Speaker Jase Bolger (R-Marshall) and House Minority Leader Tim Greimel (D-Auburn Hills) about the “grand bargain” legislation and Detroit’s future. “I appreciate the Republican leadership to get the support for Detroit done,” says Greimel. Indeed, the bills were important for retirees, and both representatives told Craig that a fair and balanced package was more important than partisan divisions. “Detroit’s success will determine the success of southeast Michigan and the region as a whole,” Greimel says.

The Detroit bills have also led the legislature to realize that state priorities are just as much a priority as serving each district separately, they said. However, help from the state will have strings attached, and part of that will be state oversight. Bolger and Greimel both say that Detroit’s City Council and Mayor Duggan have been working hard, so state oversight doesn’t necessarily have to mean tight control.

Bolger is also scheduled to participate in a discussion Friday at the conference that will focus on resilience and strong leadership during and after Detroit’s bankruptcy.

Of course, he’ll be interviewed on the conference stage by WDET’s Craig Fahle, general manager and host of The Craig Fahle Show. So his appearance won’t be a complete repeat of his column as Craig plans some questions of his own. But Landrieu makes a few points worth highlighting.

First, he emphasizes his belief that helping New Orleans post-Katrina and Detroit as it aims to emerge from bankruptcy and create a financially stable city are part of the American responsibility:

After Hurricane Katrina devastated New Orleans, flooding more than 80% of the city, MSNBC host Chris Matthews asked me, “Why should a guy driving a cab up in Detroit” care about rebuilding New Orleans? I said that an American tragedy requires an American response. This is the same reason why someone in New Orleans should care about Detroit and its struggles. Only if we remain one nation, indivisible, can we be strong. We need each other.

Second, he recognizes Detroit as having opportunity as it restructures post-bankruptcy. That’s a similar message to what is said after natural disasters as communities rebuild: “with disaster comes opportunity.” Landrieu writes, “There is no greater engine for growth, no greater power for innovation, and no smarter investment to make than in Detroit. Now the struggle of years past is giving way to new opportunities.”

Third, he’s an optimist. “I know Detroit will show us, too, that it can come back better than before. The spirit of Detroit is unbreakable as the iron forged in its furnaces and factories. Bankruptcy is not the end, it is not even the beginning of the end. It is just a way station on the road toward a better future.”

We’ll report on the Mackinac Policy Conference audience response to Landrieu and his message tomorrow.

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